Elevated pancreatic βcell cholesterol levels impair insulin secretion and reduce plasma insulin levels. This study establishes that low plasma insulin levels have a detrimental effect on two major insulin target tissues: Adipose tissue and skeletal muscle. Mice with increased β-cell cholesterol levels were generated by conditional deletion of the ATP-binding cassette transporters, ABCA1 and ABCG1, in β-cells (β-DKO mice). Insulin secretion was impaired in these mice under basal and high-glucose conditions, and glucose disposal was shifted from skeletal muscle to adipose tissue. The β-DKO mice also had increased body fat and adipose tissue macrophage content, elevated plasma interleukin-6 and MCP-1 levels, and decreased skeletal muscle mass. They were not, however, insulin resistant. The adipose tissue expansion and reduced skeletal muscle mass, but not the systemic inflammation or increased adipose tissue macrophage content, were reversed when plasma insulin levels were normalized by insulin supplementation. These studies identify a mechanism by which perturbation of β-cell cholesterol homeostasis and impaired insulin secretion increase adiposity, reduce skeletal muscle mass, and cause systemic inflammation. They further identify β-cell dysfunction as a potential therapeutic target in people at increased risk of developing type 2 diabetes.